FREQUENTLY ASKED QUESTIONS
WHAT IS A CONVERTIBLE BOND ?
A convertible bond is a bond of a corporation that can be exchanged for another security, usually the common stock of the same corporation. Generally, no payment is required to effect "conversion" other than the surrender of the bond. The convertible bond will always sell above its "conversion value", there are usually no reason to "convert" the bond. As an average, the convertible bond will trade approximately at a 20% to 25% premium above its "conversion value", (conversion ratio X price of the common share). The conversion privilege normally lasts for the life of the bond.
WHY ARE CONVERTIBLE BONDS ISSUED ?
Convertible bonds are usually issued by corporations when other means of raising money would be more expensive. The conversion feature is a "sweetener" to persuade investors to accept a rate of interest on a bond that is below prevailing levels. They do so because if the price of the stock rises in value, the value of the convertible bond will rise with it.
WHERE CAN I BUY CONVERTIBLE BONDS ?
Convertible bonds can generally be bought and sold anywhere stocks and bonds are traded. Many convertible bonds are listed on different markets, others are traded O.T.C. (over-the-counter).
WHAT IS THE MINIMUM AMOUNT THAT CAN BE BOUGHT ?
There are generally no minimum amount to buy.
HOW TO READ THE CONVERTIBLE BOND PRICE.
In financial publications, " corporate convertible bonds " listed on the exchanges are distinguished from nonconvertible bonds by the designation of "cv" in the current yield column.
Convertible bonds are usually issued at "par" ($1000), they are redeemed at maturity, also at "par" ($1000). They pay interest twice a year.
In the newspapers, the price of convertible bonds are quoted in hundreds. For example, when the price of the convertible bond is trading at $1000, it will be quoted in the newspapers as trading at $100 ( $1000 / 10 ).
The conversion ratio ( the number of shares that the bond is converted into ) is usually quoted as the conversion ratio divided by 10. For example, if the conversion ratio is quoted at 10, the bond is then convertible into 100 common shares, (10 X 10).